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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

June 16, 2014

Banking on the Financial Institutions as Gatekeepers

With all the changes and new participants in the payment industry, financial institutions remain the participants in the best position to know their customers. They still play a central role in transactions, so laws, regulations, and rules view them as gatekeepers, best able to protect consumers from unauthorized payments and fraudulent business practices. This gatekeeper role has never been simple, but the increase in the number and type of businesses conducting transactions over the internet and mobile devices has added to its complexity and difficulty. Complicating the gatekeeper role further is the increasing number of intermediaries involved in the payments stream.

Over the years, regulators have issued guidance to institutions highlighting issues related to high-risk businesses and service providers. In the fourth quarter of 2013, both the Office of the Comptroller of the Currency and the Federal Reserve Board issued guidance on third-party risk management for financial institutions. The new guidance highlights the growing importance of managing relationships with payment participants and makes it clear that institutions have to focus on managing customer relationships, which starts at onboarding.

Regulatory pressure is one approach to keeping the payments system safe, and so is the pressure that law enforcement agencies put on financial institutions. A recent example includes the crackdown of the New York Department of Financial Services on unlawful payday lending practices.

Payments system rules are also effective in keeping financial institutions focused on indicators of the fraudulent use of a payment type. For instance, NACHA Operating Rules include a provision that says an institution is out of compliance if its businesses have a return rate for unauthorized transactions over 1 percent. (A previous post addressed proposed enhancements to the NACHA Operating Rules to address additional indicators of fraud.)

An even stronger type of pressure exerted on financial institutions is when an agency bans a payment type entirely or restricts its usage. For instance, the Federal Trade Commission issued a proposal last year to ban the use of remotely created checks by telemarketers. If a payment type is banned, the financial institution's role is to enforce the ban with its business clients.

The emphasis on the financial institution's gatekeeper role underscores the continued importance of protecting consumers from fraudulent payment practices. It also highlights the fact that this role is not an easy one and brings with it certain risks and costs.

By Deborah Shaw, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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